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13 October, 2015   |   By David Trenner, Intelligent Pensions   |   Blog

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Will anyone use the new state pension top-up opportunity?

More than seven million Britons are being offered the chance to top up their state pensions.

Men over the age of 65 and women over the age of 63 can get up to £25 a week extra on their state pension, in return for a one-off payment.

At first glance the extra income of £1,300 a year in return for an investment of £22,250 for a person of 65 looks attractive, and it will be for someone who does not smoke or drink and who is in good health and does not want any risk or any return of capital on their death.

Based on current rates (from the Money Advice website) someone of 65 living in a G2 postcode – where our office is – who was average height/weight, non-smoker, not a heavy drinker and generally in good health would get just £794 p.a. from the best provider.  If they were a heavy smoker the income would increase to £992 p.a. and if in addition they were overweight and were taking medication for high blood pressure and high cholesterol it would be £1,121 p.a. Add another unspecified medical condition and the best offer would be £1,281 p.a.

On the face of it these rates suggest that the government offers best value …. Except that the pension contribution would get tax relief. Assuming 20% relief and therefore a gross contribution of £27,812.50 the incomes rise to £1,003 p.a., £1,254 p.a., £1,416 p.a. and £1,619 p.a.

Now of course not everyone of 65 will have sufficient earnings in the tax year to qualify for 20% relief, but conversely some people will qualify for relief at 40% or even 45%.

There is also the option of deferring the state pension and living off the capital for three years, which could produce a better result depending on tax and other benefits.

If a client came to us with £25,000 to invest I think it is fair to say that the FCA would expect us to do a bit more than just telling them to use it to top up his or her state pension, the figures above demonstrate that it might not be the best pension deal they could get …. never mind other investments which might offer tax-free income, which the pension will rarely be, or even a modicum of risk which the client might be happy to take in return for higher rewards!

Like all things pension, the decision to use the new state pension top-up is relatively complex and will depend on a host of individual factors. Unfortunately the government has not made things very clear and if you only have £25,000 to invest you may not wish to spend fees for specialist regulated advice to ensure you make the best decision.  If you pay for advice and the adviser gets it wrong you can be compensated; if you just do what the government says and it is wrong for you there is no comeback.

Please email davidtrenner@ipifa.com if you have any comments or questions.